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Thursday, July 13, 2006

Information Technology and the Location of Corporate Headquarters

Note: I just saw this posted at Brad DeLong's and realized it was lost in the TypePad crash, so I'm reposting it.

This is an example of what Paul Krugman discussed in his column "The New York Paradox" where agglomeration economies, the benefits from the clustering of related firms, create an incentive for firms to locate in New York's financial center. However, up until recently, the high cost of locating an entire headquarters operation in New York city was prohibitive. That changed with innovations in information technology that lowered the cost of moving corporate headquarters to New York by allowing many of the support personnel to work in lower cost areas in other parts of the world and communicate electronically with upper management.

This article on the movement of biotech headquarters to the U.S. to be located near sources of financing, particularly to gain access to listing on NASDAQ, gives more examples of the growing practice of using information technology to separate upper management from core operations in order to take advantage of economic opportunities in other geographic locations. It also shows that the phenomena is general - New York is not the only destination - there are agglomerations of biotech firms in places like Cambridge, Massachusetts and Carlsbad, California that are attracting headquarters in search of access to financing, and there is evidence of this beginning in the UK as well:

Europe's biotech 'immigrants' to America, by Andrew Pollack, Commentary The New York Times/IHT: When the Scottish government injected $9 million into the biotechnology company Cyclacel last October, the country's enterprise minister explained that "there could not be a more important company for Scotland's future." So how did Cyclacel show its gratitude just two months later? By moving its headquarters to Short Hills, New Jersey, and merging with a publicly traded American company.

Cyclacel executives say there was no slight intended to the government and the company's 65 research scientists, who continue to work in Dundee, Scotland, and Cambridge, England. "The issue was one of access to the capital markets of the United States," said Spiro Rombotis, Cyclacel's chief executive. Only American investors, he said, could provide the tens of millions of dollars needed to carry the company's cancer drugs through clinical trials.

Cyclacel is not alone among European biotechnology companies that consider their science second to none, while conceding the superiority of U.S. financial markets. A number of European players from countries including Denmark, France and Germany have come to the United States for greater access to the world's largest investment pool for life sciences. ...

The United States has long been the world leader in biotechnology. But ... other countries have caught up. Europe now has 1,613 biotech companies, compared with 1,415 in the United States... The European companies, however, are typically smaller than their U.S. counterparts. ... they often lack the capital to get beyond the early stages of research and development. ...

Thus the wave of immigrant companies, like BioVex, which was formerly based in Oxford, England, but now has its headquarters in Cambridge, Massachusetts. Although its scientists remain in Britain, BioVex recently used its American base to file for an initial public stock offering on Nasdaq.

Some of the foreign companies intent on a Nasdaq listing have sidestepped an IPO by doing a reverse merger with an American company that has already gone public ... IDM, a French drug developer, used a reverse merger to acquire the Nasdaq listing of Epimmune. IDM is now based in Irvine, California, although its research operation and most of its employees remain in France.

The German company Micromet now has a Nasdaq listing and a U.S. headquarters, after reverse-merging with Cancervax, of Carlsbad, California. Most of its operations are still back in the home country. In May, a company started ... in Denmark to develop a drug for osteoporosis went public through a reverse merger with a U.S. shell company... Originally called Nordic Bone, the drug company is now based in San Francisco and has a more cosmopolitan name, Osteologix. ...

This year, two U.S. companies have even gone public on London's Alternative Investment Market instead of in the United States, although neither has moved its headquarters to London.

One of them ... raised about $20 million in the London market. The other ..., a Waltham, Massachusetts, company trying to win U.S. regulatory approval for a genetically engineered salmon - raised about $35 million in London. "I have trouble raising money in the States, and yet you can raise money on a transgenic fish in a place where they'd never allow it," said Elliot Entis, chief executive..., referring to Europe's opposition to genetically modified foods.

Asterand, a supplier of tissue samples for pharmaceutical research, merged with a publicly traded British company in December to gain a listing in London, even though most of Asterand's operations remain in Detroit. "The cost of being a U.K. public company is significantly lower" than in the United States, said Randal Charleton, the chief executive.

One factor working against the trend of European companies moving to the United States is the increasing willingness of U.S. investors to place some of their bets abroad. "Today you do not need to be listed on Nasdaq," said Wolfgang Söhngen, chief executive of Paion, a German company traded on the Frankfurt Stock Exchange. "Sophisticated investors invest globally." ...

There are also logistical challenges in moving to the United States. Oxxon Therapeutics, a British company, moved its headquarters to Boston but then moved back to England. "It's extremely difficult to manage small operations on both sides of the Atlantic," said Craig Smith, Oxxon's chairman. ...

    Posted by on Thursday, July 13, 2006 at 08:47 PM in Economics, Technology | Permalink  TrackBack (0)  Comments (2)


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